Table of Contents
This is a follow up to our article A Beginners Guide: Is it Money or is it Currency?.
What Money Isn’t
It appears many people are confused about what money is, even though they may know the properties of money. You see it when people “debate” the properties of gold and silver versus cryptocurrency versus currency. They say one property or the another is the sole reason why something is a money or why something else isn’t. There’s no logical consistency to the arguments.
This is something that needs to be clarified.
I’m going to deconstruct money in a way that will help you understand what money is through the eyes of what it is not. This way you’ll know money when it comes your way!
Money is…
- A Medium of Exchange (MoE)
- A Unit of Account (UoA)
- Portable – Can be easily carried
- Durable – Lasts a long time
- Divisible – Can make change
- Fungible – Changeable
- A Store of Value (SoV)
- Relative Scarcity
In A Beginners Guide: Is it Money or is it Currency? we stated…
In order to be money, an asset must be easy to exchange and a unit of account for people to compare goods against. Along those lines it must be portable and thus durable so as not to lose value in transport. It must be divisible to make change and fungible so the asset can be traded for 1 equal unit with another exactly. Finally, the asset must be able to store that value through time and space with a relatively scarce supply.
This precisely defines what makes something a money. Each and every property has a specific purpose for existing. And each property serves its purpose.
But what happens if you start removing properties?
Money Isn’t…
Let’s go through each property and see what happens when we remove any one of them.
Remove: Medium of Exchange
When an asset lacks the property of being a medium of exchange, it begins to resemble numismatic coins, bitcoin, or collectibles, such as a diamonds or Non-Fungible Tokens (NFT’s). Their usage in everyday transactions is typically limited due to factors like illiquidity, a speculative nature, and challenges in executing easy, inexpensive transactions. Essentially, these items, while valuable, aren’t convenient or practical for regular commerce due to these inherent restrictions.
Remove: Unit of Account
When an asset does not serve as a standardized measure of value, it mirrors more closely to items used in barter systems. As it cannot represent a uniform measure for economic transactions, its value becomes subject to individual negotiations, making it less convenient for systematic trading. Think of trading cattle or sacks of grain, where every transaction requires a new negotiation of value.
Remove: Portable
When the property of portability is removed from a form of “money,” it becomes inconvenient for transactions. A prime example of this would be something like real estate, which is a valuable asset but cannot be easily transferred or carried around, thus it becomes less practical as a medium of exchange in day-to-day transactions. In other words, the lack of portability inhibits an asset’s ability to be used readily for trading or buying goods and services.
Remove: Durable
If an asset lacks durability, it compromises its ability to act as a reliable store of value. Take perishable items such as food or flowers for example – while they hold value, their quick degradation makes them unsuitable for preserving value over an extended period.
Remove: Divisible
An asset without divisibility, like a unique piece of art or a vintage car, is less suitable as a form of money. The inability to separate the asset into smaller, equivalent units makes it inconvenient for a wide range of transactions, particularly those of smaller value. Imagine trying to buy a coffee with a painting – the value of the painting far outweighs the cost of the coffee, making it an impractical form of payment.
Remove: Fungible
Fungibility is the property that ensures each unit of an asset is interchangeable with another of the same type. Without fungibility, an asset becomes unique or non-interchangeable, resembling a distinctive NFT or a rare artifact. When each unit of the asset carries a different value, it complicates its use as a standard form of money. For instance, a surveilled blockchain ledger could erode fungibility in a cryptocurrency context – as each coin carries its unique transaction history, it essentially disrupts fungibility by rendering each coin distinct.
Remove: Store of Value
Eliminate the property of ‘Store of Value’, and you’re left with an asset that acts more like a fiat currency. Such items, often controlled by government authorities, may continue to facilitate transactions, but their value is subject to inflation or economic instability, eroding over time. While they can be used for immediate purchases, their inconsistent value makes them less reliable as a long-term store of wealth. An example of this might be currencies in countries experiencing high inflation rates, where the currency continues to lose purchasing power over time.
Remove: Relative Scarcity
When an asset loses its property of ‘Relative Scarcity’, it often descends into a category of low-value assets, reminiscent of items in mass abundance. The balance between supply and demand is key to maintaining value. When an asset is overly abundant or supply greatly outweighs demand, its value can sharply diminish. An example of this could be common pebbles on a beach; despite their potential uses, their excessive availability makes them unsuitable as a form of money.
Not Money… Simplified
This table summarizes the above. It’s important that ALL, not some, not a few, ALL properties must be present in order for an asset to be money.
| Property | Result if Removed |
|---|---|
| Medium of Exchange | Becomes a Collectible (like a Diamond or NFT) |
| Unit of Account | Becomes Barter Item (Lack of Standard for Trading) |
| Portable | Inconvenient for Transactions (like Real Estate) |
| Durable | Poor Store of Value (like Food or Perishable Items) |
| Divisible | Becomes an Indivisible Asset (like a Collectible Art Piece) |
| Fungible | Becomes a Unique or Non-Interchangeable Asset (like a Specific NFT or Precious Artifact) |
| Store of Value | Becomes a Currency (with little Value) |
| Relative Scarcity | Becomes a Low Value Asset (like Items in Overabundance) |
Monetary Properties Are the Key
Hopefully, you’re starting to understand why the interconnected properties of money are so important individually and in their totality.
Once you understand how each property relates with one another you’ll really start to get a feel for why some things are money and why some are not.
The Wealth Miner
If you’re new to investing in precious metals and want an easy way to get started check out our book The Wealth Miner: A Modern Guide to Striking it Rich in Precious Metals.
